Schedule C negative direct compensation to recordkeeper

[WCC]

I am reviewing a 2017 Form 5500 prepared by a large record keeper. The record keeper name is listed on Schedule C Part 1, 2(a). Under (d) their direct compensation is listed as a negative number. Does anyone know how a record keeper receives a negative direct compensation number? Does it have to do with revenue sharing and the way it is credited back? 

Thank you

[Peter Gulia]

While the obvious is to ask the plan's administrator and its recordkeeper, your query invites speculation about possible reasons direct compensation might be reported with a negative amount.

Could the plan's administrator (perhaps with guidance from an accountant, a recordkeeper, or another service provider) have been reporting Schedule C on an accrual basis of accounting?  If so, could an adjustment, perhaps because the service provider was paid in an earlier year more compensation than the service provider was entitled to, explain the 2017 negative amount?

Also, crediting indirect compensation against the plan's obligation to pay direct compensation and year-by-year variations and timing differences might sometimes result in a negative amount for the direct portion of a service provider's compensation.

[david rigby]

Any other boxes checked?  Especially Box e, "did service provider receive indirect compensation?"

(BTW, line 2 is for vendors receiving more than $5K.)

[chc93]

In our one case that I remember, the prior TPA apparently refunded amounts that were paid to them after their services were terminated.  Negative amount was reported on the Schedule C Part I 2(a) column (d).  This was for plan year ended 01/31/2018.  Haven't heard anything about this from IRS and/or DOL.

[Belgarath]

Is there even any obligation to report it on a Schedule C? Never having seen a negative amount, I 've never had any reason to look into it, but it seems counterintuitive that it would be reported at all.

Caveat - this is without even looking at the Schedule C instructions - just an "off the cuff" thought.

[Peter Gulia]

Some recordkeepers design systems to turn out Schedule C information without filtering it for any cutoff amounts.

Some plan administrators choose to report more information than Schedule C requires.

Again, all of us are imagining what might be involved in what WCC describes.

[WCC]

Thank you for the ideas, this is helpful. I am not authorized to speak with the record keeper, just getting ready for a presentation and trying to come up with ideas as to why/how this could happen.

Thanks again.

[DAK]

I have come across this with probably the same large record keeper who characterizes the revenue credits as a “negative” fee because they “reduce the recordkeeping fees otherwise paid by the plan”.  The amounts can be reconciled to the activity in the suspense account set up in the plan for deposits when there is excess revenue.  Standard reporting is available and is also provided to the plan sponsor and auditor with the draft Form 5500 and Schedules.  

This record keeper refers to the Form 5500 Schedule C instructions for element (d) to explain entering the amount as direct compensation:

“Enter the total amount of compensation received directly from the plan for services rendered to the plan during the plan year. If a service provider charges the plan a fee or commission, but agrees to offset the fee or commission with any revenue received from a party other than the plan or plan sponsor, for example, as part of a commission recapture or other offset arrangement, only the amount paid directly by the plan after any revenue sharing offset should be entered in element (d). Enter in element (d), as direct payments by the plan, amounts a plan sponsor, or contributing employer or participating employee organization in the case of a multiemployer or multiple-employer plan, pays a plan third-party service provider reimbursed by the plan.”

 

[Elizabeth G]

Does the record keeper credit the amount of the "negative" fee against the fees due for the following year? The concern I see with reporting a negative number is that it suggests that the record keeper is getting paid more that it is obliged to be paid for the year. That would raise an issue about whether the fees being paid are appropriate (at least as reflected in that Form 5500). Perhaps the information provided to the sponsor and auditor otherwise makes clear that record keeper is being paid only what it is due?

Regarding the $5k reporting threshold, I believe that applies to the total direct and indirect. So a negative number wouldn't necessarily mean that reporting is not required.